The Report Company: How would you appraise Malta’s recent economic performance?

Charles Borg: Notwithstanding the things that are happening around us, our economy has remained very resilient. The resilience of the economy is basically because successive governments and the industry have wisely decided to diversify into different sectors, so we are not totally dependent nowadays on tourism, or manufacturing, as we used to be in the past.

Today Malta is a service-driven economy. There are advantages and disadvantages to this. The advantage is that you can sustain economic upturns and downturns, and that is what Malta has managed to do. The disadvantage is that services businesses do not have deep roots within a country. They do not have to invest a lot of capital in the country, and if things change they very quickly move away. The government, the regulator and industry to a certain extent need to look five years ahead and understand what are the next opportunities, so that if something happens, and if certain industries move away, these can be replaced

The proof of Malta’s success can be seen in the level of employment. If you look at the level of employment and economic growth in Malta, they are the envy of other European countries, and our neighbours. We have an economic growth of around three percent, which is higher than almost anywhere in the EU, and we have a minimal rate of unemployment at around five percent. In certain sectors, like in construction for instance, or in accountancy, we have to get people in from abroad.

We at the bank are seeing growth in a number of sectors, although we are seeing some continued contraction in other areas, like for instance in the retail sector which continues to suffer a little bit. This is primarily because there is a lot of competition through the internet. Notwithstanding this, I think that we have continued to see growth, even in construction, primarily because there are a number of government-driven projects, and when you have large projects, there tends to be a ripple effect on other sectors.

TRC: The bank’s interim first-half results show a 16 percent year-on-year profit growth. What is behind this performance, and what is the bank’s strategic direction going forward?

CB: We are a Maltese bank and our main business is Malta and the Maltese economy. It has always been like that, and it will continue to be like that, because ultimately we are an indigenous bank. We finance the economy. We supply liquidity. Unless there are financial institutions that supply liquidity, the economy will not grow. The Bank of Valletta is 50 percent of this economy. That does not give us power; this gives us responsibility.

We have indeed seen 16 percent growth year-on-year, which is in today’s world a very good result. However, let’s look at both sides of the balance sheet. First and foremost, we are a very conservative bank. We are a universal bank; we are not a specialised bank that offers only one solution, we offer the whole range of solutions. And therefore we have to ensure that we focus on the main areas of our business.

We finance our whole operation through our deposits. We have always been the main bank to attract local deposits. One of the success stories for the bank is that even during the height of the crisis between 2008 and 2011, the bank continued to increase its liquidity. Excess liquidity can be a problem because you need to allocate this to profitable and sustainable business opportunities and these are not easily found.

On the other hand, the bank’s credit portfolio mirrors the structure of the Maltese economy; it is diversified and not centred in one particular area. The biggest percentage by far is the home loans. Experience has shown that the default rate of our home loans has remained low and therefore we attribute a low risk to this portfolio. The rest of the portfolio is very diversified.

TRC: The Bank of Valletta passed the recent European Central Bank stress tests. Has the outcome of the tests had an impact on your strategy?

CB: We are a systemically important bank for this economy. We did well in the exercise and the result was that the bank did not need to make any increase in capital for the business we currently have.

Following last year’s stress test, Bank of Valletta now forms part of the European banks that are regulated and supervised by the European Central Bank. In fact, we are probably one of the smallest banks in the big league, but we have to play by the same rules. The strategy of the bank was always that we retain a significant part of our profits. We have always been able to increase our capital because we have always made profits. Part of that profitability is always kept in reserve. Our policy was simple. One-third of our profits go to tax, and the remaining two-thirds are split evenly, one-third going to the shareholders, and one-third being retained.

Going forward, because we are in the big league, the ECB is telling us that we need to increase our capital because we are systemically important. The bank is growing at a faster pace than the economy and we therefore need to make additional capital. We are therefore planning to come to the market to continue to strengthen our capital.   This is where responsibility comes in. We want to ensure that we are in a position to be strong enough to support the Maltese economy in all its needs.

This regulation is the same across the board for all banks, but it is painful for a bank like us because we have a business model which is very conservative. We get our liquidity from the retail market. This is very expensive, because we have to pay an interest rate, and secondly, we have to make allowances for the deposit guarantee scheme. If you look at our financials, regulatory expenses increased by over 250 percent in the first six months of the year.

Our asset base is split almost evenly between lending and investment. The bank has a fully-fledged treasury operation that manages its own portfolio. We are very careful not to over-expose ourselves to high-risk investments, because we want to keep within the overall risk profile of the bank. Therefore, we are constantly looking at avenues where to invest and limit as much as possible volatility in the portfolio.

TRC: How important is innovation to the bank?

CB: Our biggest investment going forward is our IT infrastructure. We believe that this will give us an advantage over our competition. Up to now, we have been operating on a core banking system that has been with us for many years and a number of satellite systems that link into it. It was a system that was adopted 15 years ago. Through these years, we have introduced new technology such as the internet and mobile banking services.

Following detailed studies, we have now decided to invest in the latest banking technology. It is as if you were driving a car and you want to change the engine while it is running. We are an ongoing business. We cannot stop midway through to change the engine. We have to change this core while we move, without any faults or defaults.

This is a project that we have embarked upon. We have engaged external consultants to help us and we are in the process of choosing an IT software provider. The main focus is on making sure that the customer remains at the centre. We need to have a system which is customer oriented, and customer-centric. This is a big investment for the bank, but we have to do this because the clients keep on demanding new things, and we need to continue to upgrade our product range and become more flexible. This is a core project for the bank; once we complete this, the bank will be transformed.

TRC: What is the bank’s strategy in terms of internationalisation and investing abroad?

CB: In Malta, if the economy is growing by three percent, I cannot grow by 10 percent, so we have to grow internationally. Because of the harmonisation of regulations and the opening of the systems in terms of globalisation, that is where the growth is. However, we are taking a different approach. It is not, has never been, nor will it ever be, our intention, to buy or invest in another bank abroad. We have the capacity to do it and the liquidity to do it, but if we do it wrong it will expose the Maltese economy. What we are doing is internationalising our service, without using our balance sheet.

We are managing to attract quite a lot of international business in Malta because it is attractive to do business from Malta. What we are doing is supporting this growth. We have set up an international corporate centre, and we are doing a lot of business over there. The international financial sector in Malta is growing, and we have done a lot in this area. We have also upped our activity in terms of due diligence, because our aim is to grow sustainably. Our aim is to protect the brand of BOV and Malta as a financial jurisdiction of high repute.

TRC:  What are the main activities of the international corporate centre?

CB: The international corporate centre today has become an important part of the bank’s business, both in terms of volume and in terms of reputation. We have commissioned an international study to learn from best practice. For example, we are studying what happened in Cyprus, so that we can learn from their experience. In terms of due diligence, we are very cautious. Therefore, we have also done a due diligence on intermediaries. If you are an intermediary that is introducing business to us, we do due diligence on you so that we ensure we identify the right people to do business with. We need to protect our name, and we need to protect the name of Malta. We have to learn from the mistakes of others, and that is how we will continue to grow.

One area of growth for the centre is custody. Funds continue to come and we have an agreement with Royal Bank of Canada as our global custodian. We need to ensure that we offer custody business to the hedge funds and administrators that are setting up here. We will be creating a different structure in order to take on that business.

TRC: What is the bank’s commitment towards Malta’s socioeconomic development?

CB: I think every company has to understand that if your business is in the local economy, you have to contribute. We are a social partner. We employ a lot of people, we pay taxes, we support the economy, we borrow from this economy, so we are an important partner in the social framework.

One example is our contribution to the small and medium enterprises, to SMEs. We are the main bank for SME business. Now do I make a lot of money out of SMEs? Not really. But 90 percent of this economy is SMEs. If I don’t help them, who else is going to?

We also contribute almost one percent of our profits to social, heritage, education, environment and sports initiatives. We feel that this is our obligation as a partner in this society.

TRC: Where do you want to take the bank?

CB: I still believe that the bank has scope in terms of continuing to assist new sectors in their growth. There are new sectors such as aviation, education services, transportation, health services, and we need to build around those.

The new regulation obviously puts a lot of challenges on us, and we need to meet these challenges and seek to benefit from the opportunities. We need to strengthen our capital, and that is not a one-year plan; that is a three to four year plan, so over that period, we believe the IT systems development will help us position the bank very strongly, and raise our capital to be able to grow the business.